Bankia AT1 debut flies in post-Popular test, CaixaBank in T2

Bankia on 6 July launched its inaugural Additional Tier 1 and the first Spanish AT1 since Banco Popular sub debt was wiped out a month earlier, a EUR750m deal that achieved tight pricing on the back of as much as EUR3.5bn of demand, a day after CaixaBank reopened Spanish sub debt.

Fernando Cuesta, head of long term funding and treasury at Bankia, said it was good to see the receptiveness of the market to its debut, which – at 6% – had the lowest ever coupon for a Spanish AT1.

“The market is in a different mood to the first quarter of 2016 when there was all the noise that resulted in historic wides for everyone,” he said. “Right now, the market is much more prepared and able to differentiate something idiosyncratic, while if they like a credit, they are able to buy.

“And considering that losses in both AT1 and Tier 2 seem to be similar in case of failure, a lot of investors started to see more value in AT1 and maybe less in Tier 2, and we probably benefited from that,” he added. “This movement was already reflected in secondaries and investors wanted the opportunity to take positions in size in primary, and they got that with our transaction.”

Bankia had been working towards its first AT1 since early 2016, but, alongside the usual preparations, was held up by a technical issue relating to the conversion price floor under the instrument’s equity conversion loss absorption mechanism. Bankia resolved this by performing a 4:1 reverse share split and reduction in the nominal value of ordinary shares, but this had to be approved at the bank’s general shareholder meeting, which took place on 24 March this year.

By the time this measure was effective, Bankia’s interest in BMN had emerged and the bank decided to wait until the terms were formalised before launching the AT1, given the impact the absorption of Bankia’s smaller peer via merger would have on key metrics such as CET1 and MDA. The bank had nevertheless been lining up its documentation, putting it in a position to issue as soon as this final issue had been resolved, which happened on 27 June.

“That was released a week and a half before we priced the transaction,” said Cuesta, “and we considered that there was still time to execute the transaction before we entered into blackout. And then we were pretty quick, to be honest.”

Bankia held a two-team, two-day roadshow on 4 and 5 July, then on 6 July opened books for a Eu750m no-grow perpetual non-call five AT1 with initial talk of the 6.5% area. Cuesta said this level reflected feedback from investors, who had put in some EUR1.7bn of indications of interest – suggesting demand could prove to be of a similar magnitude to that Bankia experienced on a EUR500m 10 year non-call five Tier 2 on 13 May that was almost 10 times oversubscribed.

“In reality, demand grew to close to EUR3.5bn by around 10.30 UK time,” he said. “As we were already four to five times oversubscribed but could not increase the size, we decided to move in terms of price guidance.

“We felt that anything below 6% would not be reasonable, but that – considering the feedback from investors and the amount of demand – 6%-6.125% was something the book could live with, and in fact it was the case. Some investors left the book after the movement, as is usually the case, and then the final book size was EUR2.5bn, and that was what we had to allocate for the EUR750m at the 6% level.”

“So the pricing of Bankia at 6% implied only 50bp for the credit spread differential and new issue premium combined,” he added, noting that Bankia was trading 40bp wide of CaixaBank in Tier 2 and 60bp inside Sabadell. “Size matters in these markets and the cap at EUR750m certainly delivered traction.

“Judging by the execution and momentum during bookbuilding, Popular doesn’t appear to have slowed them down or forced them to pay a higher premium.”

Another banker said Bankia’s pricing was very competitive bearing in mind that Sabadell AT1 had underperformed in the wake of Popular’s collapse – although Sabadell’s EUR750m 6.5% perpetual non-call five AT1 debut, launched on 5 May, recovered from the high 6s when Bankia hit the market to trade in the low 6s going into the end of July.

“It probably looks easy from the outside,” he said, “but actually during bookbuilding we had this underwhelming French OAT auction and then there were the ECB governing council minutes, so it was one of these days in which the world was changing its view on interest rates and QE, which particularly affected the medium to long term deals and made pricing a fixed rate transaction challenging.

“In that sense, having a book of approaching EUR4bn probably helped when some investors reduced orders, and the result was pretty encouraging for us. We had more than 125 investors in the final EUR2.5bn book.”

The UK and Ireland were allocated 53%, France 19%, Nordics 7%, Switzerland 6%, southern Europe excluding Spain 6%, the Benelux 6%, Germany 2%, and others 1%. Cuesta noted that the UK component of the early EUR3.5bn book was higher, but fell when pricing was tightened, with France and other areas increasing their share. Asset managers were allocated 70%, hedge funds 21%, private banks 7%, and insurance companies 2%.

The transaction has a 5.125% CET1 trigger. It is rated B+ by S&P.

Bankia’s debut filled roughly half its 1.5% AT1 bucket, of around EUR1.4bn, with the bank potentially returning with a further benchmark in 2018 or 2019 to fill the remainder, according to Cuesta. Its 2% Tier 2 bucket had been filled ahead of the BMN merger, but it now has 0.15% requirement, which he said is more likely to be met with a private placement.

CaixaBank reopens Spain in style

Bankia’s strong result was in line with that achieved a day earlier by CaixaBank when it issued a EUR1bn 2.75% 11 year non-call six Tier 2 flat to its secondaries in the first Spanish sub debt issue since Popular’s resolution.

Following initial price thoughts of the 260bp over mid-swaps area, guidance was set at the mid-swaps plus 240bp area (plus or minus 5bp), before the deal was re-offered at 235bp over – 100bp inside where CaixaBank had priced a 10 non-call five Tier 2 in February. That was quoted at around 225bp over when the new issue was launched, implying a new issue premium of zero or close to zero, assuming around 10bp for the curve extension from February 2022 to July 2023.

The tight pricing was achieved on the back of around EUR2.4bn of demand good at the re-offer level, comprising some 220 accounts, with little price sensitivity in the order book, according to Hoarau at Crédit Agricole, which was a bookrunner on the deal.

“CaixaBank’s result shows further evidence of very strong technical support and market conditions driven by the level of liquidity rather than fundamentals,” he said. “The imbalance in supply and demand and redemption dynamic is intact and remains in the issuer’s favour.”

“The name is meanwhile clearly very well established,” he added, “and the pick-up it offered versus peers Santander and BBVA was clearly appreciated, even though it is a touch wide to our taste.”

Hoarau noted that the issuer’s regular presence had done it no harm in terms of pricing, and the Spanish bank highlighted that the new issue made it the largest European issuer of institutional regulatory capital debt in the euro market in 2017, with EUR5.5bn of issuance, at the same time that it was able to achieve its maturity and cost targets.

“The cost of the new issue is down 1% in terms of spread against mid-swaps compared to CaixaBank’s issue in February, which was of a shorter term, demonstrating the market credibility established by the CaixaBank brand and its acknowledged performance over the year,” the bank said.

The deal had tightened to around 220bp over going into the end of July, without having at any point traded wide of re-offer, which Hoarau said vindicated the pricing and sizing, and demonstrated the quality of placement.

“The summer lull ahead of us will continue to support spreads and valuations globally,” he added, “while new Spanish senior non-preferred transactions are set to emerge after the summer break, continuing to support Tier 2 valuations by further exacerbating the scarcity element surrounding the asset class.”